Market Health

Stocks Falling After Third Quarter Earnings Results

It’s that time of the year again!

If you guessed the annual release of the KFC fried chicken-scented firelog

Or the Jones Soda Co. (OTC: JSDA) holiday flavor pack with thirst-quenching flavor offerings such as turkey and gravy, green bean casserole, and mashed potato…

I’ll give you partial credit.

I know, nothing says the holidays more than your home smelling like a 16-piece bucket of original recipe chicken or drinking a glass of fizzy mashed potatoes.

But despite those festive releases, the time of year we’re talking about is third quarter earnings.

And regardless of whether companies are beating, missing or in line with expectations, the results are like the thought of chugging a green bean casserole-flavored soda… not good.

The “October Effect” in Effect

To kick off October, I laid out why investors should prepare for the markets to end the month down.

There’s an unappetizing trend where the Dow Jones Industrial Average has closed out October in the red five of the last seven U.S. presidential election years – including the last four consecutively.

We’re currently watching that “October Effect” play out almost exactly as expected.

Broader Markets Performance

The Dow is now down nearly 1% this October. And all three of the major indexes pulled back steeply from their highs of the month as third quarter earnings season began.

And that’s because every company – not just the bad ones – is getting hammered by the results.

Historically, companies that miss on earnings per share (EPS) expectations fall an average of 2.3% on the release.

During third quarter earnings this year, the average drop is 4.4%!

That’s almost twice as severe as the historical average.

But even worse, companies that are beating EPS expectations are also seeing declines.

And this is exponentially worse than what we’ve experienced historically.

Average One Day Relative Return

We’re in a moment where good news is not good enough and bad news is apocalyptic.

And that could be exacerbated in the coming days because this is the most important week of earnings.

Microsoft (Nasdaq: MSFT), Apple (Nasdaq: AAPL) and Amazon (Nasdaq: AMZN) will all report.

These three companies combined account for 34.38% of the Nasdaq-100’s weighting!

Where these three go, so goes the rest of the market. So I expect the October mayhem to continue. But if all three beat expectations and their results are celebrated – it’s off to the races!

A Repeat of 2000?

Mr. Market is doing his best Atlas impression.

Beyond fried chicken-scented logs and turkey and gravy soda, he is carrying a lot on his shoulders.

First, we have the traditional anxiety over the U.S. election that we’ve seen play out again and again.

But this year, there are a couple of extra spices added to the fried chicken-scented firelog.

There’s a widespread belief that this election won’t have a winner for some time. And we’re most likely going to see a repeat of the Bush-Gore debacle of 2000 where we won’t know the results for weeks. (The Dow fell 5% in November that year.)

We have a lack of stimulus headway in Congress – namely the Senate.

And the number of COVID-19 cases is increasing across the globe with new shutdown measures being implemented.

Finally, we have the fact that the markets – despite the obstacles, pitfalls, economic destruction and more – have performed quite well this year.

In fact, tech stocks have soared to new heights and the Nasdaq is up more than 26% year to date. That means these positions are likely outsized in every investor’s portfolio – whether they’re actively managed or not.

So some reshuffling may be in order over the next several weeks.

But regardless of what unfolds in the days ahead, investors have to remember to keep their heads. We always expect the best but prepare for the worst with our use of trailing stops and position sizing. That way, we’re unfazed by everything in between.

We said October was going to be bumpy. And that’s exactly what we’ve gotten. But we know that once the dust eventually settles, the markets more often than not resume their march higher.

So get yourself a KFC chicken-scented firelog and crack open a candy cane soda, and peruse all those currently discounted opportunities you want to hold long term.

Here’s to high returns,

Matthew